Indian IT services may see uptick in client spending

Reuters News

10/9/2012 5:16:36 AM - Reuters News

By Harichandan Arakali

BANGALORE (Reuters) - India's leading software exporters could see a modest uptick in outsourcing business from the United States and Europe despite a warning on Tuesday from the International Monetary Fund that it sees the risk for a serious global slowdown as "alarmingly high."

India's National Association of Software and Service Companies, or NASSCOM, expects the sector to expand exports by 11-14 percent in the current fiscal year that ends in March, compared with 16 percent last year and about 30 percent before the global financial crisis. India's $100 billion software and services industry relies on the United States and Europe for three-quarters of its revenue.

"We are far from a situation that is reassuring, but the general view is that the economic situation, especially in the U.S., has improved in the last few months," Apurva Shah, head of investment research at BNP Paribas Mutual Fund in Mumbai, told Reuters. "Even though the IMF is not saying anything new, coming from them, people are bound to sit up and take notice. The worry is that any small thing can still suddenly take us back.

"Anecdotally, especially from the larger IT companies, it seems as though the second half of the year might be slightly better," Shah said.

Any pick-up in momentum would cheer investors, especially those in No.2 provider and industry bellwether Infosys Ltd, whose shares are down by a tenth this year after missing revenue targets, lagging the 21 percent gain in the broader market.

Infosys is expected to post a 24.9 percent rise in profit in the quarter ended September 30 to 23.8 billion Indian rupees ($453.59 million), according to Thomson Reuters data, when it kicks off the quarterly earnings season on Friday.

"The mood is a bit upbeat now," said Sudin Apte, CEO of Offshore Insights, an outsourcing market consultancy that recently surveyed 267 companies worldwide on their technology spending plans.

Apte expects a loosening of purse strings compared with six months earlier, not a dramatic shift. "Now you're going to see at least a little bit acceleration in decision making," he said.

Infosys has gained nearly 18 percent since hitting a low in July when it announced a deeper-than-expected cut to its full-year growth forecast. Its larger rival, Tata Consultancy Services Ltd (TCS), added almost 22 percent from its April low this year.

"Infosys has rallied sharply on expectations that there are no further risks to FY13 revenue guidance," UBS analyst Diviya Nagarajan wrote on Oct 4.

Nagarajan expects Infosys to forecast full fiscal year revenue growth of 6 percent, including a 1.5 percent boost from its recent acquisition of Swiss consultancy Lodestone. That implies 4.5 percent growth in Infosys' legacy business, slightly below the company's guidance of 5 percent.

"We think a cut to organic revenue guidance would be a negative surprise," she wrote.

Last month, Infosys agreed to pay about $350 million for Lodestone, which specializes in advising large corporations, such as automaker BMW, on the best use of business management software by SAP AG. The purchase is the largest ever for a company that has been criticized by investors for not being bolder with its $3.7 billion in cash.

Infosys and Tata face increased competition for outsourcing contracts from global players including Accenture and IBM.

In a sign that corporate clients are eager to cut costs but are yet to take the plunge on discretionary spending, global rival Accenture grew its outsourcing revenue 10 percent in the quarter that ended in August, even as consulting revenue fell.

TCS, which will report earnings on Oct 19, is seen reporting a 35 percent rise in quarterly profit to 33.1 billion rupees, Thomson Reuters data showed, while TCS CEO N. Chandrasekaran has stuck with a bullish tone.

The outlook is "looking good, looks positive, there's no negative news," he said on Sept 25.

Demand for cost-cutting by clients in the UK, Germany and France is potentially to the benefit of outsourcers if it means moving some functions to lower-cost offshore locations.

"Indian companies are more aggressive in continental Europe than ever before," said Frederic Giron, a principal analyst with Forrester Research, who advises corporations on their outsourcing strategies and choice of vendors.

"Even second-tier IT companies are increasingly trying to get on the radar of European IT buyers," Giron said.